Tariffs and President Trump

While economists and bankers warn us about the potential dangers and negatives of the US imposing tariffs, let’s understand that President Trump is not limiting tariff threats and actions to tariffs, but a host of other things while addressing our tremendous trade imbalance. We’ll talk about that later.

First, some reminders on tariffs.

Tariffs are taxes that governments impose on trade. While they can apply to exports, they are primarily levied on imports, typically to protect local industries.

The rationale behind tariffs is straightforward:

• By making imports more expensive, tariffs make local goods comparatively cheaper and, at least in the short run, more competitive.
• Like other taxes, tariffs can provide revenue
• Tariffs can serve as tools to exert political leverage over another country and/or extract tariff concessions imposed US products.

Early last month President Trump imposed a 25% tariff on goods and services imported from Mexico and Canada.

At that time he was interested in the cooperation of those border countries on stopping massive, illegal immigration and dangerous, additive drugs, especially fentanyl, from coming into the US. He was successful in gaining cooperation on those issues.

Subsequently he reimposed those tariffs, beginning in April, to reciprocate the tariffs Mexico and Canada have imposed on US goods. At the same time he added a second 10% tariff on goods coming from China and others on Europe.

I don’t question the President’ s moves re: the border. He made himself perfectly clear and determined in fulfilling a major campaign promise.

However, I don’t agree with his strategy of lowering tariffs imposed by Canada and Mexico by threating and perhaps imposing tariffs on the two countries without first opening negotiations on trade. Add the fact that during his first term he negotiated a new trade deal with the two countries – the US-Mexico-Canada Agreement (USMCA) replacing NAFTA.

I say this despite Mexico’s 16% ‘temporary’ value added tax on US goods through 2026. In addition to other goods, Canada has tariffs of up to 200% on US dairy products. Both are examples of violations of USMCA and were not addressed by the previous administration.

Trump is a master of the deal, and his public strategy of imposing tariffs on our neighbors in response to their tariffs without a sit down is not called for – yet. If there ever were three countries where starting a trade war would hurt everyone it’s us three.

I say this with the full knowledge that both countries depend on the US for their defense from foreign adversaries. Canada, as a member of NATO, has followed in the footsteps of most of Europe to spend significantly less than the treaty calls for in their defense budget – and relies on us to protect them, including a nuclear shield and policing the international seas.

One of the primary purposes of tariffs is to protect domestic industries from foreign competition. By making imported goods more expensive, tariffs encourage consumers to buy products produced within the country, thereby supporting local businesses and potentially leading to job creation. However, protectionism can also lead to higher prices for consumers, as domestic producers may not face the same competitive pressures to keep prices low.

My guru of economics, Milton Friedman, did not believe in tariffs. He believed in free trade – as I do as an ideal. But he did not believe there were consequences for the ‘dumping’ or subsidizing products imported for sale in the US to increase market share. Friedman thought if a foreign country wanted to do that, in the long run, the foreign products would be cheaper and therefore good for the consumer and the economy.

In the 50’s and 60’s world, maybe an economist could get away with that theory. But not today. Today we have China that, along with a few other countries, want to defeat the United States in every way, including economically.

Frankly, “free trade” is a theory. Like communism, it doesn’t exist.

A closer look at our trade imbalances provides more insight into “reciprocal” tariffs. Here’s what President Trump is faced with.

There are only two countries of any size in the world where the US has a positive trade balance. They are United Arab Emirates, $17.8B and Australia, $17.5B. We have a negative trade balance with all the other major countries headed by China at $270B, followed by the European Union, $220B, Mexico, $157B, Vietnam, $113B, Tiawan, $67B, Japan, $$63B, S. Korea, $60B, Canada, $55B, and Thailand and India at $41B each. All have tariffs (some very high) on US goods and services.

Overall, in 2024 we bought almost $3T from foreign countries while exporting about $2T – ergo, a trillion-dollar US trade imbalance with the rest of the world.

It’s worth noting that Trump in almost all cases, is not using tariffs within the traditional definitions, meaning protection of a specific US industry or industries by making prices higher for imported goods and domestic goods cheaper for those specific industries.

Again, Trump is using tariffs and the threat thereof to influence the past assumptions by friendly countries of our magnitude regarding their defense and our huge consumer market – as well as trade. Decades of diplomacy have failed.

Further, he’s interested in bringing more production (companies) – and jobs – here.

He’s using tariffs as a tool for foreign policy as well as to negotiate more favorable trade agreements. We owe it to our future that this tariff piece is successful – particularly when it comes to China.

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Have a great and prosperous week.

Hug somebody.

References:

https://www.wilsoncenter.org/article/tariffs-101-what-are-they-who-foots-bill-and-who-wins-if-anyone

https://www.dailywire.com/news/economist-milton-friedman-explains-why-tariffs-are-frank-camp

https://www.investopedia.com/terms/t/tariff.asp

https://brilliantmaps.com/us-balance-of-trade/

SPIDER Bytes

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